It is becoming an orthodoxy among enthusiasts for the European project that the EU has rediscovered its mojo. The populists have been defeated. Growth in the eurozone is picking up. Public support for the EU is growing. Most importantly, the Franco-German engine is back up and running and a Great Leap Forward in integration is planned that brings an end to the EU’s woes.
Put together, the inevitable conclusion is that Britain has badly misread the facts by writing off the EU as a failing enterprise.
It is understandable that Europe’s supporters should look for good news after years of crisis. However, at the risk of spoiling the party, reports of the EU’s revival are greatly exaggerated.
The problem, as always, is the eurozone. Migration, terrorism, Russia and Brexit are all difficulties but the EU’s existential crisis is the impoverishment of millions in the Mediterranean caused by the monetary straightjacket in which they are trapped. If nothing changes, Italians and others will eventually elect governments who promise to bring their suffering to an end by leaving the single currency, and take the edifice down with it.
The current spurt of growth (1.8% annually in the first quarter) is hardly evidence that monetary union is working. Most of this is occurring in the north of the Eurozone, and especially in Germany (up 2.9%). By contrast, the Mediterranean is still stagnant. Italy grew by just 1.2% in the first quarter and Greece by just 0.4% and even then, only with the help of ECB which continues to pump the European financial system with money.
Worse, this may be as good as it gets. After four years of growth, the Eurozone is probably at the peak of its current economic cycle and, if history is any guide, it is headed for a downturn before the end of this decade.
This will pose a major challenge for the eurozone’s institutions. Potentially, the ECB can increase its purchase of government bonds, with all the attendant risks for monetary stability and the already-excessive debt in recipient countries. If not, then the only way an insolvent government can avoid a financing crisis is to re-launch its own currency.
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Fortunately, this worst-case scenario can potentially be mitigated if the Eurozone moves rapidly towards establishing some kind of institutionalised burden-sharing. The nature of this mechanism is up for debate, whether debt mutualisation, euro-bonds or a full fiscal union. Whatever the final arrangement, the basic idea that Emanuel Macron, the Commission and others are now pushing is the same: that rich members of the Eurozone directly transfer funds to poorer members.
After a decade of short-term fixes in which European leaders have avoided tough decisions, the prospect of a permanent solution to the Eurozone’s problems is welcome news. The problem is that these noble objectives are at odds with the political reality of a severe solidarity deficit across Europe.
It is certainly true that growing numbers of Europeans are favourably inclined towards the EU and that no populist party has made an electoral breakthrough, at least in western Europe. However, as a Pew poll published last month makes clear, a majority of Europeans want their governments to take fundamental powers back from Brussels, not see more power given away – especially power over their money, which is what economic burden-sharing inevitably means.
This solidarity deficit begins in Germany where the prevailing view is that the solution to excessive debt in the Mediterranean is for the locals to obey the rules and stop spending. Although Angela Merkel has recently hinted at some sort of alternative remedy, there is no evidence to suggest that her electorate, or indeed her own political party, is ready for Germany to provide a permanent stream of funding to the Mediterranean.
The one possibility for a breakthrough is if France, the Eurozone’s second-biggest economy and a perennial rule-breaker, can demonstrate that it would not be a liability if the Germans agreed to open their wallets. But this is tricky. To assuage German fears, a president with a limited franchise must enact the kind of fiscal and structural reforms which none of his predecessors ever managed in the name of European order which half the electorate rejected in the first round of presidential elections.
Even if Macron succeeded, Germany and France would then have to persuade other rich, eurozone members, such as the increasingly Eurosceptic Austria, Netherlands and Finland, to accept greater burden-sharing. And to persuade the Mediterranean to accept permanent fiscal diktat from Germany. And to persuade the euro-outs in the East, which oppose the whole idea of a “core Europe” from which they are excluded, not to veto all this.
Against this backdrop, European leaders would ideally concede that the whole idea of incorporating radically different economies into a single economic framework was a historic mistake and embark on an orderly dismantling of the euro zone in which those countries which clearly cannot cope are set free. Not only would they be relieved of their debts but northern governments and the ECB would underwrite their transition to a new national currency.
However, there is no apparent appetite for an “ever looser union”. True believers are averse to any rolling back of the European project in which they have invested their hopes of peace and prosperity. Realists worry about the cost to northern taxpayers and the potential for unintended consequences. And even those who are most suffering – in Greece and Italy – still believe the euro can be made to work for them.
There is no doubting the eagerness of Macron who has correctly identified that a paradigm shift is needed to save the euro zone and, by extension, the EU; nor Merkel’s awareness that the EU is Germany’s best protection against itself.
Following the German elections, we will therefore probably see some proposal that obliges Germans to dig a little deeper into their pockets and which Macron can use to justify reform in France. But the agreement will be so loaded with caveats and conditions that it does not really commit Germany to anything or, crucially, provide any relief to the suffering of the Mediterranean.
Perhaps this analysis is all wrong there are deep reserves of solidarity in Europe which remain undiscovered. But there is no evidence of this in opinion polls, elections or the positions adopted by governments, Instead, the Mediterranean seems destined for continued austerity, stagnation and the mass emigration of its young, before a cyclical downturn in the European economy finally brings matters to a head.
For the moment, enthusiasts for the EU can take solace in the fact that the EU’s problems are momentarily obscured from view. The EU did not crash after the Brexit referendum and many Europeans say they want the EU to work, not least France’s youthful new leader. But bold statements and a little economic growth do not equate to any kind of revival. Behind the façade, nothing is fixed and nothing is likely to be fixed.
Instead, the existential crisis of the last few years is set to continue for precisely the same reason as it has until now – there is no politically-saleable solution to the eurozone’s desperate contradictions. Far from making a Great Leap Forward, the EU is going nowhere.
Timothy Less is the Director of the Nova Europa political risk consultancy and a former British diplomat.